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Actual economic news.


      The media has been filled with stories about actual economic news. The bad news is that most of it is bad news. The big question is, what does it mean? There are two major directions you can look at the data. You can either use the data to predict what the national economic evaluations will be or you can use the data to make judgments about what the national economic evaluations are.
     A recent study by Oxford University academics David Norton and economist Angus Deaton showed that economic data is highly correlated with political factors. Specifically, economic growth is much faster in economically developed nations than it is in economically developing countries. That observation underlines my argument about the importance of the social choice theory in making sense of the real data on the national debt and budget deficits. In particular, I am talking about the welfare economics view of the data.
     According to welfare economics, the key to understanding the real facts about the economy is to look at the distribution of economic shock, not just the actual economic news. If one looks only at the distribution of economic shock, one gets the false sense that stimulus programs are having a significant effect on the economy. It is quite possible that the stimulus programs will have a limited effect on the distribution of economic shock, but not enough to change the long-term policies that have caused the current crisis.
     That brings me to the next point. Policy environments have much greater effects on the future path of an economy than does the distribution of economic shocks. A central bank can increase interest rates by printing too much money, causing a depression. However, if the money is printed at the right time, with the right scale, the expansion of the money supply causes a rise in demand for goods and services. That increased demand pushes up the supply of these goods and services, increasing both employment and inflation. Even, if the unemployment rate increases, with the correct policy environment, inflation will fall, because there has been some additional investment in labor and infrastructure.
     An additional point to consider is that although national economic evaluations do affect policy, they are affected by many different drivers. Surveys measure how people feel about an issue or problem, and economic voting patterns are therefore affected by many different forces. National economic evaluations will therefore typically look only at how people feel on a particular issue, when asked. Surveys of how people actually make decisions, however, take into account other factors that might affect the way people vote on an issue.
     One way of looking at this is to contrast study 1 above with the national debate over the recent cuts to the Employment Department. The Employment report was released just before Christmas; on balance, most people were pleased with the reduction in staff numbers, though some economists said the cuts were skewed by the recent dip in consumer spending. On balance, the cuts did little for economic news, since most of the cuts were concentrated in the business sectors and were thus relatively minor in scope. The same is true of the Government's response to the recession, which came in the form of tax rises and budget cuts. In both instances, however, people were more or less evenly divided in their feelings about the policies, with more people feeling bad about the cuts than about the employment figures.
     One way to see whether actual economic evaluations are influenced by public opinion is to compare them with theoretical economic evaluations, which involve using statistical methods to predict the behavior of firms. Most textbooks on economic development treat empirical evidence in much the same way as research on experimental data, using it to try to predict the effect of changes in a variable (e.g., wages) on the basis of known demographic and economic facts. Although these methods have had some great success in the past, they are not widely used today, probably because of the difficulty of experimental statistics and the lack of experimental data available. Because of this, theoretical economists tend to look at national interest rates as a measure of public support for different government policies. If a country's interest rates are low, a policy may be economically harmful, but if the rates are high, a policy may be supported by the public because it will encourage saving.
     To get a clearer picture, we may contrast empirical studies of economic evaluations with political ratings of government performance. Using these two measurements of public opinion, we can find where the policy that affects a country is implemented, where it is not implemented, and how popular it is. The latter measurement compares how well the policy is working, how well it is being implemented, and how popular it is across the country. When looking at theoretical evaluations of public support for a policy, we simply compare the actual policies that were implemented against the policies that were not implemented and observe what the effects of these policies were. Over time, countries with low economic evaluations also tend to have low political support; conversely, countries with high economic evaluations tend to have high political support.

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